Extreme Delays in Processing Form 1045 Refunds
- Dec 7, 2021
As the IRS continues to experience serious delays in its operations, many individual and business taxpayers have been stuck in limbo waiting for their refunds. Tentative Refund applications (“Quick Refund”) that are supposed to be processed by the IRS within 90 days are now routinely taking six months or longer, with some taxpayers waiting for over a year.
What Is a “Quick Refund?”
When taxpayers have a net operating loss during a tax year, they can carryback the loss to offset income earned in a previous year. As part of the CARES Act of 2020, Congress amended IRC Sec. 172 to permit losses to be carried back to the five preceding tax years, rather than just three. The easiest and preferred method of doing this is by filing a Form 1045, Application for Tentative Carryback, which is due within twelve months of the end of the year in which the loss arose. (IRC Sec. 6411(a); Treas. Reg. § 1.6411-1(c)) Corporations can similarly apply for a Quick Refund using Form 1139, Corporate Application for Tentative Refund. Under IRC Sec. 6411(b), the IRS is expected to review the applications, make the appropriate adjustments and issue the appropriate refunds to the taxpayer within ninety days. However, the processing time is currently much longer. The IRS website states that it is taking significantly longer than ninety days, but that it cannot currently provide a timeframe. See IRS Operations During COVID-19: Mission-critical functions continue | Internal Revenue Service.
Refund Statute Expiration Date (RSED)
Under IRC Sec. 6511(d)(2), a taxpayer has three years from the due date of the return that generated the net operating loss (including extensions) to file a claim for refund for the prior carryback years on Form 1040X or Form 1120X. It is important to note that a Quick Refund application does not constitute a formal claim for refund for purposes of this statute. Therefore, if the IRS does not process a Form 1045 or 1139 and issue the appropriate refund(s), the taxpayer must file the claim or claims (i.e., amended tax returns) prior to the expiration of the three-year deadline. Failure to do so could result in the refund(s) being time-barred.
Unfortunately, processing delays are not just limited to Quick Refund applications. As of October 30, 2021, the IRS also had a backlog of over 2.7 million unprocessed amended returns. The typical processing time for an amended return is 16-20 weeks, but the current processing time is considerably longer.
Taxpayer Advocate Service Also Experiencing Significant Delays
As a result of these delays, the Taxpayer Advocate Service (“TAS”) has been flooded with requests for assistance from taxpayers and practitioners. TAS is currently on pace to receive more than 253,000 new cases this year in its 79 local offices. In the past, TAS typically opened and closed cases in an average of 74 days. See: NTA Blog: TAS Facing Similar Challenges as the IRS: Processing Delays and Low Level of Service - Taxpayer Advocate Service
However, it is now typically taking more than 74 days for a case to even be assigned to an agent, much less resolved. To alleviate this unprecedented caseload, the TAS recently made the decision to temporarily stop accepting cases that solely involve unprocessed amended returns. See NTA Blog: IRS Delays in Processing Amended Tax Returns Are Impacting TAS’s Ability to Assist Taxpayers - Taxpayer Advocate Service
Interest on Delayed Refunds
One thing that lessens the blow for taxpayers is that the IRS is required by law to pay interest when a refund is significantly delayed. Under IRC Sec. 6611, the IRS must pay interest on any overpayment of tax, unless the refund is issued within forty-five days of the later of: (1) the loss year return due date; (2) the received date of a delinquent loss year return; (3) the date the loss year return is filed in processible form; or (4) the date the overpayment arose. According to a report released by the U.S. Government Accountability Office earlier this year, in fiscal year 2020, the IRS paid $3.03 billion in interest on delayed refunds. (See GAO-21-251, TAX FILING: Actions Needed to Address Processing Delays and Risks to the 2021 Filing Season.) The applicable interest rate for overpayments is set on a quarterly basis, with the current rate being 3% (2% in the case of a corporation). See Interest rates remain the same for the fourth quarter 2021 | Internal Revenue Service (irs.gov)
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Naveid P. Jahansouz
Naveid Jahansouz is a Tax Senior Manager and a member of the Tax Controversy Group with nearly 10 years of experience providing comprehensive tax services.
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